Mexican mining company Grupo Mexico won the FEC in March with a $2.1 billion bid, a price that raised eyebrows in the industry.
G&W’s bid for the FEC was “not competitive,” CEO Jack Hellmann said at an investor conference today, repeating comments he made in early May during the railroad’s first-quarter earnings call.
G&W has built its 122-railroad empire largely by buying short lines and regionals that are neighbors. “Contiguous acquisitions are how G&W is built,” Hellmann says, noting the economic advantages are “tremendous.”
“The economics of being a proximate railroad are such that you should always be the successful acquirer,” Hellmann says.
Except when it’s too expensive.
“FEC is a great railroad serving an attractive market,” and would fit well with G&W, Hellmann says. Plus, it is headquartered in Jacksonville, where G&W’s operations center is based. An acquisition would have resulted in significant cost savings by eliminating redundant functions.
But in the end, the price wasn’t right.
“As a result, we maintained our acquisition discipline and shifted our focus to other investment opportunities that we think will generate greater returns for our shareholders,” Hellmann said during last week’s earnings call.
The story was the same in 2007, when G&W lost out to Fortress Investment Group when seeking to buy the FEC.
Hellmann said the acquisition pipeline remains strong, as always. But he doubted that CEO E. Hunter Harrison’s arrival at CSX Transportation would result in immediate spinoff opportunities of the Class I’s lower-density lines. Harrison has said as much.
If and when a Class I is ready to spin off a line, Hellmann says G&W will be a preferred buyer given its successful track record. Traffic has grown considerably on the Rapid City, Pierre & Eastern, the 651-mile west end of former Dakota, Minnesota & Eastern that G&W bought from Canadian Pacific in 2014.
The RCP&E handled 65,000 carloads last year, up from 50,000 at acquisition, and the railroad has a clear path to 80,000 carloads, Hellmann says. And in five years it may hit 100,000 carloads as businesses locate and expand on the railroad.
Hellmann spoke Tuesday at the Wells Fargo Industrials Conference.
With regards to the Grupo Mexico successful bid ($2.1B? $4.1B?), isn’t there are fair amount of real estate that FEC owns in Florida which (might?) justify the rather exorbitant purchase price?
@Jim Norton, AMEN TO THAT, I hate the thought of FEC locomotives suddenly becoming painted in “Borg Orange”.
Quit buying railroads and focus on investment in your properties. It’s almost like a Ponzi scheme. The FEC is a brand to be cherished; it would’ve been a travesty to see it converted to orange.
Is $4.1 billion the correct number? I had seen $2.1 billion published previously. Can anyone validate this number? It’s pretty jaw dropping.
For the sake of those nice looking FEC locomotives……..Thank goodness!